Learn about the types of bankruptcy available to you and how they work.
Bankruptcy is a viable financial option used by thousands of people each month who are facing mounting unsecured debt, like credit card debt or medical bills, or are at risk of losing their home or car. You should consider bankruptcy if you are under these desperate conditions:
- You simply cannot pay off your debt no matter what course of action you try to take.
- You have so much credit card debt and your interest rates are so high that despite not making any new charges on your cards, your debt continues to grow.
- A creditor is about to seize your property, garnish your wages or levy against your bank account.
- Your utility services are in jeopardy of being shut off.
If you think you need to file, but you want a professional to evaluate your situation to make sure you don’t have any other options, we can help. Call Consolidated Credit today at or request help now online with a free Debt & Budget Analysis.
If you decide to file, there are a few things you need to know about the process – particularly following bankruptcy law changes that took place in 2005.
Steps to take before filing for bankruptcy
You will need to go through the following in order to file:
- Means test: This test determines whether your income is insufficient so that your debts can be discharged through bankruptcy. It compares your income to the median income in your state. This only applies to Chapter 7 bankruptcy; if you file for Chapter 7 and fail the means test, you may still be able to file for Chapter 13 bankruptcy.
- Credit counseling briefing: This briefing may be completed in person, over the telephone or the internet. The briefing includes an assessment of your personal finances, conversation about possible alternatives to bankruptcy and a personal budget plan. You must complete this within a six month period before filing.
- Due diligence: This is an investigation conducted by your attorney of the information you provided.
Types of bankruptcy
There are basically two types of bankruptcy – Chapter 7 and Chapter 13.
With Chapter 7 bankruptcy, your assets are liquidated to pay off at least a portion of your debt, then the remaining balances are discharged. Some assets may be exempt, depending on the state you live in, but in any case you won’t lose everything – items like clothing and day-to-day household items don’t get liquidated.
Chapter 13 doesn’t liquidate assets. Instead, you pay back at least a portion of what you owe on a court-ordered repayment schedule. Once you’ve made all the payments, the remaining balances on your debts are discharged.
When to file for Chapter 7 bankruptcy
If you cannot pay your debts and are receiving collection calls and notices and don’t have much property or assets to lose, then Chapter 7 may be right for you. Once you file, collectors are legally banned from calling you and the bankruptcy trustee will plan to take all of your nonexempt assets, such as a second vehicle, family heirlooms, stocks and bonds and other valuables to pay off your debts.
At the end of your Chapter 7 bankruptcy, the judge will erase or discharge all of your unpaid debts, which means you won’t have to pay them. However, you will have to pay any debts that cannot be discharged or that are associated with any nonexempt assets you are keeping. For instance, child support, spousal support, student loans, criminal penalties and most taxes generally cannot be discharged.
When to file for Chapter 13 bankruptcy
If you have a regular monthly income but just can’t afford to pay all your bills and are in jeopardy of losing your home, cars and other valuable possessions, then this option may be the answer. There is no means test to qualify. Your ability to repay your secured debts is the main requirement.
When you file for Chapter 13, your attorney will prepare a debt reorganization plan, which will spell out exactly what you intend to do with your debts. These plans usually give you three to five years to pay off what you owe. Bankruptcy law requires that the plan treat certain kinds of debts in a particular way. For example, you must pay the full amount of priority debts, including unpaid income taxes, unpaid property taxes, past due child support, and spousal support (alimony).
The next step after your reorganization plan has been filed with the court is to attend a creditors’ meeting. The trustee assigned to your case will ask you questions while under oath regarding your assets and debts to determine if you can afford to pay more than your reorganization plan indicates. Your creditors can ask questions about your finances as well.
Once complete, a confirmation hearing in front of a judge takes place at a later date. If a creditor or the trustee disagrees or takes issue with one or more of the terms on the repayment plan they can discuss the matter at the hearing. If the parties cannot settle the agreement the judge may decide the matter. As a result you may be required to make specific changes to your plan before the judge approves it.
After filing for bankruptcy
After you file for Chapter 7 or Chapter 13 bankruptcy, you are required to complete a U.S. Trustee approved Debtor Education course before you can receive your discharge. This means two courses are actually required:
- A credit counseling course before you can file your bankruptcy
- A debtor education course before you can receive a discharge.
Your bankruptcy attorney may refer you to a Debtor Education course or you may be able to use the same resource used for the credit counseling course.
Advantages/disadvantages of filing for bankruptcy
- Get rid of unsecured debt
- Stop foreclosures and repossessions
- Prevents garnishments of wages
- Halts calls from creditors and collection agencies
- Allows you to keep certain assets
- May need to pay fees for courses and bankruptcy attorney
- All debts are not eliminated, like student loans, some taxes, child support, etc.
- Bankruptcy will remain on your credit report for up to 10 years
- Bankruptcy could delay major purchases such as home or auto
- Higher interest rates could be tacked on to future lines of credit
Before filing for bankruptcy
If you haven’t already, investigate what a Consolidated Credit debt management program can do for you. Our certified credit counselors will evaluate your budget and help you improve your money management skills. Call today at . You can also take the first step online with a free Debt & Budget Analysis.